A proposed buy-out by Citic Ka Wah is likely to test the limits of mainland flexibility towards the finance sector Hong Kong-based lender Citic Ka Wah Bank is proposing to buy a Shenzhen-based finance company in a deal likely to test how far the central government is prepared to relax its control over the financial sector. The mid-tier bank said it would buy out the existing four shareholders of China International Finance Co (Shenzhen), which recorded a net loss of US$3.91 million last year. While it did not name the four shareholders, they are believed to be Bank of East Asia, Sumitomo Bank, Nomura International and the Shenzhen branch of the Bank of China. Under the proposal, Citic Ka Wah would pay the four shareholders US$896,733, or 1.1 times the company's book value. This amount represents just a fraction of the $7 million the four reportedly pledged when China International Finance was established in 1986. At the time of its launch, China International Finance was heralded as the first foreign-invested joint venture finance company in the mainland. While there are rules governing foreign-ownership of mainland banks, finance companies exist in a grey area. 'The uniqueness of this deal is that China International Finance is a very small company with only one branch,' said Fitch banking analyst Arthur Lau. Citic Ka Wah - classified as a foreign company in the mainland - is ultimately controlled by China International Trust and Investment Corp (Citic), China's biggest investment company, which is directly controlled by the State Council. This could help smooth the approval process. Citic Ka Wah is wholly owned by locally listed Citic International Financial Holdings - a Hong Kong-based financial conglomerate backed by China's cabinet. The deal's success will allow Citic Ka Wah time to expand into China ahead of its peers, which are lining up to set up direct branch offices under the lower-asset hurdle granted under the closer economic partnership agreement (Cepa). As Cepa will not come into place until January 1, it could mean application procedures for mainland branch openings by Hong Kong banks will have to wait until then. If this formula works, the hunt for mainland financial institutions by local lenders intent on speedier access to the mainland may take hold, according to Mr Lau. A Citic Ka Wah spokeswoman said the move was just one in a series of options that it was considering for China. The bank is also considering the opening of a branch office in the Pearl River Delta area. She did not rule out further acquisitions in the future. The bank said it had applied for China Banking Regulatory Commission permission for the purchase, as well as clearance from a local watchdog, presumably the Hong Kong Monetary Authority. Should the deal not get a green light within 60 days of the signing of the sale and purchase agreement, it would become null and void.